HIGHLIGHTS OF THE KENYA BUDGET STATEMENT 2019/2020
The Honourable Cabinet Secretary for the National Treasury, Henry Rotich, delivered his budget statement on 13 June 2019. The theme for this year’s budget was: Creating Jobs, Transforming Lives – Harnessing the “Big Four” Plan. The Big Four Plan is clearly one of the key legacies that the Jubilee government want to leave behind under President Kenyatta’s reign and it was not surprising that there were significant allocations to it as well as tax measures that are expected to give it a boost.
The Cabinet Secretary acknowledged that the economy does face challenges which he listed as:
- Creating an enabling environment for businesses, particularly for the micro, small and medium enterprises in order to accelerate the growth of our economy and create more jobs for our youth;
- The need to be prudent and efficient in our spending;
- The need to mobilize domestic resources to fund priority projects and programmes;
- The need to reduce our fiscal deficit in order to stabilize and reduce our debt; and
- The need to implement reforms that will enhance our efficiency and make us more competitive.
Overall, the economy, at least according to the government, grew in 2018 by 6.3% up from 4.7% in 2017. The expectations are that similar levels of growth will be achieved in 2019 and that, in the medium term, growth will be 7%. In comparison to the global economy and indeed, Sub-Saharan Africa, Kenya is performing extremely well. While this is clearly the case, the obvious question must be how much of this growth is benefiting ordinary Kenyans. We must also be conscious of the fact that delayed rains will impact agriculture; however, the government’s view is that this will be made up by tourism and construction. There are potential headwinds that were acknowledged: global trade tensions; rise in oil prices; and more weather shocks.
The two factors that are perhaps having the greatest impact on Kenya’s economy are the high level of government recurrent expenditure and corruption. One would have expected some announcements on this, but apart from tinkering with things like travel allowances and rent and allocating more to the corruption fighting bodies little was said.
Manufacturers will recall that last year a measure was introduced to give additional deductions for electricity bills to the sector. The missing ingredients were the rules and regulations and these will now be issued – a year after the legislation was introduced. Given the importance of manufacturing in the Big Four Plan this is surprising to say the least. The sector will benefit from a reduction in Import Declaration Fee (“IDF”) from the current 2% to 1.5% on imported raw materials. IDF on finished goods will, however, increase to 3%.
A team is being constituted at the Treasury to “quickly” validate VAT refunds with a view to clearing them in two months. The necessity of this is questionable given that refund claims are generally supported by an auditor’s certificate and, more often than not, audited by the Kenya Revenue Authority (“KRA”). The need to promptly refund VAT is not in question and the government acknowledges this, but what is the need for this additional review? Given that it appears the team is being constituted, one must hope that it will deal with the claims urgently and not get caught up in a red-tape situation.
The good news on VAT is that the withholding VAT regime is to be changed reducing the current percentage of the taxable value from 6% to 2%. This is probably the most positive announcement made. Withholding VAT has created a significant burden on taxpayers and should, in our view, never have been introduced. Despite the reduction in percentage, the administrative burden will persist. Perhaps a better option would be to have considered exempting complaint taxpayers from the regime.
Further good news, but we have heard this before, is that KES 10.9 billion has been prioritised to settle debts from the government in respect of the purchases of goods and services – this will be a welcome relief to taxpayers. In addition, the Competition Act is to be amended to ensure prompt payment to suppliers. When you add the President’s directive on clearing of goods at the port, there may be a light at the end of the tunnel for struggling business.
Interest rate caps are set to become a thing of the past as the budget proposes the law to be repealed. The caps have been a significant factor in the ability of the private sector to obtain credit (and therefore be able to invest) so this is a positive move. Will our Members of Parliament let this pass? The importance of removing the interest rate caps for the SME sector cannot be over emphasised given that they are the engine of growth in the economy. They desperately need access to cheaper credit to grow.
Capital gains tax is set to rise from the current 5% to 12.5% which will be a blow to investors. That said, by global standards, 12.5% is relatively low so there should not be any complaints. However, there was better news in the fact that property transfers under group reorganisations will be exempt from the tax. This has been a major problem with the existing legislation.
Excise duty, which has become the government’s go to tax in recent years, will now be levied on bets staked at 10% - another attack on the betting industry. The introduction of this tax may not be sufficient if the intention is to reduce betting by the less privileged in society. Perhaps introducing a minimum bet size may be better coupled with civic education programmes which would achieve more. Those that fall into the betting trap will inevitably resort to frauds and other offences, creating social mayhem. For those of you who enjoy your cigarettes, wines and spirits, the duty rates are set to increase by 15%.
Overall, the budget did not address many of the pressing issues facing the country and a number of the announcements have been heard before. Of course, the devil is in the detail, so we must wait for the Finance Bill to really understand the impact.
Further, we have put together a note on the highlights of the 2019 budget as follows:
The comments highlighted in this newsflash represent our preliminary views on the Budget Statement.
We shall issue a more comprehensive newsflash once we have reviewed the Finance Bill 2019, which may include items not reflected in the Budget Statement.
The CS mentioned that the Income Tax Bill is at an advanced stage of legal drafting and is soon expected to be tabled in Parliament. The CS pointed out that the Bill will modernise the income tax legislation to boost revenue generation, including taxation of income generated from the digital economy.
- Capital gains tax: the CS proposes to increase the capital gains tax (CGT) rate from 5% to 12.5%. Increasing the CGT rate has been an ongoing conversation for some time now as the current 5% has been considered quite low compared to other jurisdictions. There is also a proposal to exempt from CGT the transfer of property necessitated by restructuring of corporate entities. We anticipate that the modalities with respect to the scope of the exemption will be set out in the Finance Bill or amendments to the Income Tax Act.
- Withholding tax: an expansion of the scope of withholding tax on service fees has been proposed - from covering “professional and management services” to include security services, cleaning/fumigation services, catering services offered outside hotel premises, transportation of goods excluding air transport services, sales promotion, marketing and advertising services. It appears that the expansion of this list is in order to provide clarity on the nature of services that are subject to withholding tax.
- Lower income tax for plastic recycling plants: a lower corporate income tax rate of 15% is proposed for investors operating plastic recycling plants, for the first 5 years of operation of a plant. The intention is to promote investment in plastic waste recycling.
Value Added Tax
- VAT refunds: the CS proposes to adjust the VAT refund formula that was included in the VAT Regulations in order to ensure that taxpayers are able to fully recover the portion of input tax relating to zero-rated supplies. The CS also pointed out that he has constituted a team to validate the outstanding VAT refunds with a view to expedite refunds.
- VAT withholding: citing the challenges in the administration of the VAT withholding system, there is a proposal to reduce the VAT withholding rate from 6% to 2% to reduce the accumulation of VAT refunds.
- VAT Exemptions: there is a proposal to exempt from VAT:
- (i) locally manufactured motherboards and all inputs used in their manufacture, in a bid to promote the manufacturer and supplier of electronics and computers; and
- (ii) all services offered to plastic recycling plants and supply of machinery and equipment used in the construction of these plants. By doing this the Government hopes to boost plastic waste recycling which remains an environmental challenge in Kenya.
- Betting: proposal to introduce 10% excise duty on the amount staked by punters. Taxation of betting has been a key issue for a number of years now. We expect that the proposal is likely to place an obligation on betting companies to deduct and remit the excise duty at the point of punting.
- Electric powered vehicles: reduction of excise duty on electric powered motor vehicles to 10% (the excise duty applicable for motor vehicles, other than locally assembled motor vehicles, is 20%).
- Cigarettes and alcohol: increased excise duty rate on cigarettes, wines and spirit by 15%.
Customs, Fees and Levies
- Import Declaration Fee (IDF): proposed reduction of IDF on intermediate goods and raw materials used by manufacturers from 2% to 1.5%, and increase of IDF on finished goods from 2% to 3.5%.
- Railway Development Fee (RDF): proposed increase of RDF for finished products from 1.5% to 2%.
Tax Procedures Act
- Exemption on PIN requirement for foreigners: amendment to empower the Commissioner to exempt non-Kenyans from the requirement of having a PIN, in certain circumstances, when opening a bank account.
- Amnesty for companies listing on GEMS: introduction of an amnesty on interest and penalties for companies listing on the Growth and Enterprise Segment (GEMS) for up to two (2) years prior to the date of listing.
In addition to the above tax measures, the CS has proposed the following key changes:
- repealing the interest rate cap for lending by banks and financial institutions: The continued push to do away with the interest rate capping is premised on the view that the capping has not had the desired effect of increased lending to MSMEs and has also had negatively impacted lenders;
- empowering the Competition Authority to deal with abuse of buyer power and ensure prompt payment to suppliers;
- introducing the National Electronic Single Window Bill, 2019 to legislate the use of the National Single Window System, re-establish the Kenya Trade Network Agency, and amend various statutes to recognize and formalize the issuance of electronic certificates/permits currently issued by various agencies through the system;
- amending the Capital Markets Act to empower the Capital Markets Authority to enforce penalties and sanctions on market players who violate rules and procedures; and
- introducing comprehensive insurance for boda boda: requirement for all passenger carrying boda boda and tuk-tuks to maintain comprehensive insurance in order to cover passengers and pedestrians.
We will keep you updated on developments and issue a comprehensive analysis of the Finance Bill 2019 once it is published.